Ka-Ching: no two nations have such close or broad trade relations as Canada and the United States. Sometimes, that closeness is tested.

When it comes to trade the U.S. plays a very hard game. There are few better (or worse, depending on which side of the border you live) examples of this than the endless fights over softwood lumber.

For as long as anyone can remember, Americans have complained about how Canada runs its lumber industry. Most of the timber cut in Canada is grown on land owned by provincial governments. Lumber companies pay something called "stumpage fees" for the right to harvest trees. In exchange for long-term cutting rights, companies promise to manage the forest sustainably and to meet certain employment levels. Canada's governments restrict the export of raw logs in order to keep sawmill jobs in Canada.

In the United States, most forests are privately owned. Lumber companies bid at auctions for the right to cut timber. But, there isn't enough timber in the U.S. to meet all of the country's needs. So, bidding for trees at auction drives the price up, sometimes to levels three times higher than the stumpage fees in Canada. This, inevitably, is reflected in the price of a finished two-by-four.

The American argument is that Canada's stump age fees are set artificially low. This, the U.S. claims, is an unfair trade subsidy to Canadian producers.

In 1930, the U.S. government imposed its first duty on Canadian lumber. Five years later, the duty was pushed higher, although eventually it was eliminated. By 1962, lumber producers in the Western U.S. began squealing about unfair Canadian competition again. Soon, the complaints went national and were organized by the Coalition for Fair Lumber Imports.

Following intense pressure from U.S. lumber companies, Washington has launched several legal challenges against Canadian stumpage fees. These challenges go before independent panels of experts within groups such as the World Trade Organization (WTO) or the North American Free Trade Agreement (NAFTA). All panels have decided in Canada's favour. Canada won on this issue three times, with various trade tribunals ruling that its system of forest management does not include unfair subsidies.

But, U.S. lumber interests don't like to be told this. As soon as the dust settles from one ruling they launch another complaint, the most recent coming in May 2002. Washington slapped a 27.2% tax on Canadian softwood lumber imports. The idea was that this would raise the price of Canadian lumber in the U.S. market so that home builders would switch to the American product.

(Interestingly, Atlantic Canada ducked the U.S. duty as it has for decades. That's because most of the region's timberland is privately owned.)

To some extent, the plan worked; to some extent, it didn't. Many small and less efficient producers in Canada have been forced to shut down and lay off workers. With production concentrated at the most efficient sawmills, the industry's overall production costs have come down. The result is that Canadian softwood lumber is still less expensive in the U.S. market, even after the duty is added. Canada has maintained its share of the American market but profit margins have been thin, and thousands of forestry workers have been laid off.

So, the protection the U.S. lumber industry" wanted has, in fact, backfired. The Economist reported in early 2003 that: "Twice as many American mills (114) as Canadian ones (51) have shut, or cut their output. Managers admit that the duties have failed. So, they want to replace them with export quotas."

As before, the World Trade Organization has decided that the U.S. violated trade rules when it put that 27 percent duty on Canadian lumber. In May 2004, a NAFTA panel came to a similar conclusion.

Despite losing over and over again, the U.S. lumber industry just doesn't give up. The Coalition for Fair Lumber Imports maintains that: "Canada's lumber subsidies are destroying the U.S. lumber industry, threatening its workers with mounting unemployment, and denying many tree farmers a market for their timber crops. The impact of these subsidies is apparent everywhere. Despite a strong home-building market, U.S. lumber prices are touching new lows, bankruptcies and mill shutdowns are high and climbing higher, while Canada's share of the U.S. market approaches 35 percent, a near record high."

But, through the generosity of the Americans, the problem can be fixed; all Canada has to do is adopt American lumber practices. That's the solution offered by Grant Aldonas of the U.S. Commerce Department in January 2003. To do so would force Canada to abandon a forestry management system that has supported dozens of communities and more than 75,000 logging jobs across the country. The Canadian ban on the export of raw logs would disappear, forcing the closure of many Canadian sawmills.

There is another way out for Canada, again offered by the generous U.S. lumber industry--place voluntary limits on the amount of lumber we ship south. This is what Canada was doing prior to the latest dust up, and amounts to a partial cave in to U.S. pressure tactics. After all, panel after panel has ruled the U.S. action illegal.

In December 2003, Ottawa tossed around the idea of accepting the voluntary quota solution. The feds argued it was better than no solution at all, which seemed to be the only other option Washington was offering.

But, all the provinces except British Columbia said no. (B.C. is hurting the most from the U.S. tactics and is keener to get a settlement than the others.) Some of the lumber companies didn't like accepting quotas on exports either.

Many in industry, government, and elsewhere have urged Canada to take a stand. The argument being that if Ottawa lets the U.S. get away with beating up on us over softwood lumber, it will do the same thing with steel, hogs, and everything else Canada exports south.

Surprisingly, Canada is now finding allies in the United States. An American think-tank, the Cato Institute has been crunching some numbers. By its calculations, protecting U.S. lumber producers adds between $800 U.S. and $1,300 U.S. to the cost of a new home. So, an alliance of home builders and consumers has called for open free trade in lumber between Canada and the U.S. Even some members of the House of Representatives are now backing this idea.

NAFTA Plus

Business groups in Canada and the United States are pressing both countries' governments to move to a closer trading relationship.

But, don't we already have a free trade agreement? Yes, we do, but the corporate world wants more complete integration.

Since the terrorist attacks of 9/11, the U.S. has been understandably somewhat spooked about the security, of its borders. The 19 hijackers who caused the horror were all living quietly in the United States before launching their outrage. The immediate and prudent measure for Washington was to tighten border security to try to stop any more violent nutbars from getting in. The downside of this is the slowing of cross-border trade.

The Canadian Manufacturers and Exporters group says that border delays add as much as ten percent to the cost of trade. This, says the business lobby, hurts job creation and undermines the ability, of companies in North America to compete globally. The solution is a completely open border between Canada and the United States. For that to happen a security perimeter would have to surround the entire continent. Could Canada hold onto independent policies on immigration, foreign affairs, and other international issues if snuggled up to the U.S. behind the same protective fence? Probably not.

Wendy Dobson directs the Institute for International Business at the Rotman School of Management, University of Toronto. She likes what is being called "The Big Idea" or "The Great Bargain." Instead of dealing with issues one at a time (lumber this time, maple syrup last time, baseball bats next time) what's needed is a grand, overall vision. Nothing revolutionary about this; in fact, there's a working model we can follow.

The European Union was created over a 50-year period and it's still evolving today. It started as a customs union in which goods and services circulated freely within a common area. Tiffs grew into a common market that allowed people as well as capital, technology, and trade to move in an unrestricted way within the member states. Now, the European Union is shifting towards political integration. Canada and the United States are already further ahead in their integration than Europe was when it began its grand vision. So, argues Ms. Dobson, why not press ahead and get the same kind of union going on this side of the Atlantic?

Meanwhile, over at the Institute for Research on Public Policy (IRPP) in Montreal, Senior Economist Daniel Schwanen is proposing a treaty of North America

"This treaty," says the IRPP, "would foster an environment where nationals and companies would feel more secure and comfortable in each other's countries, despite the likelihood that significant cross-border differences would remain." The Institute's complete proposal is contained in Deeper; Broader: A Roadmap for a Treaty of North America, published in April 2004.

On the other side of this issue is the Canadian Centre for Policy Alternatives. Marc Lee is an economist with the group and author of the April 2004 book Indecent Proposal." The Case against a Canada-U.S. Customs Union (ISBN: 0886273889).

He argues that Canada needs open U.S. market more than the U.S. needs open access to Canada. That puts Canada in a weaker bargaining position; something we can expect the U.S. to exploit vigorously. Here's Mr. Lee's take on what the cost to Canada might be: "Washington would surely be interested in opening up public services and Crown corporations to foreign competition, dismantling agricultural marketing boards and the Canadian Wheat Board, and the removal of foreign ownership restrictions in cultural industries, telecommunications, and banking. The U.S. would also like to stake a bigger claim on Canada's energy resources."

Ottawa needs to steer a middle course between those who favour more integration and those who oppose it. The Policy Research Institute is trying to find that route. Under its North American Linkages (NAL) program it is looking for ways to smooth out a number of trade irritants.

There's the whole problem of manufacturers having to comply with regulations in both Canada and the U.S. That means double filing of documents, two sets of standards to meet, and added costs at every turn.

The move towards a customs union has a lot of appeal to many people. Canada and the U.S. would set up the same tariffs towards the rest of the world outside the NAFTA region. The NAL people say this "may provide gains of up to two percent of GDP," which is a serious amount of coin. "However, Canada and the United States would have to share a common trade policy toward other countries." This would almost certainly mean Canada having to accept American dictates.

Border regions are a concern. Social values between neighbouring states and provinces are not the same--think gun laws, decriminalizing possession of small amounts of pot, same-sex marriage to name a few current examples. Taxation policies can be vastly different, so Canadians getting their booze and smokes in the states would kill local retailers.

Finally, the free movement of labour across the border will be a tangled knot to undo.

But, integration is taking place. Premiers from Quebec and the Atlantic provinces have met with their counterparts from New England. Their discussion focussed on how to combine energy markets. In the West there is a similar enthusiasm for getting Canadian energy to American markets.

In 2002, Time Magazine reported on a study from the previous year by the Carnegie Endowment for International Peace. According to the study Canada and the United States, in sectors such as autos and computers, were becoming more integrated than the European Union. "The U.S.-Canada border is likely to disappear before any politician finds the political courage to negotiate its removal," the stud)" says.

It seems many Canadians agree. A 1999 study by Maclean's found that a third of Canadians think that Canada and the U.S. will merge by 2025.

Mad About Cows

Canada's beef producers have been going through a very rough period. In May 2003, a single cow in a herd in Alberta was found to have bovine spongiform encephalopathy (BSE), commonly known as Mad Cow disease.

When Canada announced the discovery of the Alberta cow, the United States closed the border to exports of Canadian beef within hours. In the weeks following the U.S. ban Canada's 90,000-plus beef producers were losing an estimated $11 million per day.

The beef industry in North America is fully integrated; live cattle and meat are transported across the border constantly. There is so much movement back and forth that American and Canadian cattle form one single herd; there is no greater or lesser danger of BSE cropping up in either country. But, for four months this trade was shut down completely. In September 2003, the U.S. allowed some beef products to begin entering the country but the total ban on live cattle remained.

The price cattle producers could get from meat packers had plummeted. Prior to BSE, cattle were selling at auction for $1,500 to $1,600 a head; after that single case was discovered, the price fell to between $400 and $500 a head. Farmers and ranchers were having to sell their animals at a loss. Curiously though, the price of beef on supermarket shelves across Canada did not drop.

Ottawa and several provincial governments have put up hundreds of million of dollars in aid to hard-hit beef producers, but even this is not enough. Some have sold off part of their land to pay bills, others have had to declare bankruptcy. This has led Western premiers to call on the federal government to treat the Mad Cow outbreak as a natural disaster.

Meanwhile, cattle producers in the United States were doing just fine. When that mad cow showed up in Alberta, nations such as Japan, Mexico, and South Korea closed their doors to Canadian beef. American farmers were quick to fill the supply gap, with exports of beef and live cattle jumping by 17 percent in the summer of 2003.

Then, a mad cow was found in the States (it had originally come from Canada) and the world shut out American beef. Ottawa also put restrictions on U.S. beef coming into Canada. Washington now says these restrictions are getting in the way of complete freedom of movement for Canadian beef into the U.S.

Canadian beef and cattle are perfectly safe. So, Canadian beef producers ask themselves, why hasn't Washington reopened the border? Most of them answer their own question by suggesting that it's in the commercial interests of Americans to keep the border closed.

When Prime Minister Paul Martin met with U.S. President George W. Bush in May 2004 the beef issue was high on the agenda.

Mr. Bush said: "My administration is committed to a policy of free trade when it comes to beef. It's in our nations' interests that live beef be moving back and forth."

As this is written, three months later, the border remains partially closed.

Runaway Productions

A lot of the movies we watch that are set in the United States with American storylines are actually' filmed in Canada. The low value of the Canadian dollar, Canadian tax laws, and skilled Canadian film crews make it a lot cheaper for movie producers to shoot in Vancouver, Toronto, Winnipeg, or elsewhere. They call it "runaway production" and a lot of people in the U.S. movie industry don't like it. The Film and Television Action Committee claims runaway productions cost the American industry $10 billion U.S. a year, and has launched a drive to halt the business.

The campaign against Canada includes some high profile names including veteran director Robert Altman. In an interview with film critic Roger Ebert, published in the Chicago Sun-Times, the 78 year-old director says it's obscene to move film production to Canada just to take advantage of tax breaks. "Why was (the musical) Chicago made in Toronto? To save a couple of million dollars, which, of course, doesn't go to the artists." But, it does go to the producers, and as they are the ones who put up the money to make the movie they get to call the shots.

The pain is felt by caterers, hotel owners, restaurants, car and truck renters, and a host of other services that supply movie productions. The Chicago Film Office says in its best year, 1999, film and TV production brought $125 million into the cit3,. The year 2002, gathered in a dismal $27.6 million.

Now, the election in 2003 of Arnold Schwarzenegger as California's governor has sent a shiver through the Canadian film industry. Superstar Schwarzenegger claims the credit for moving production of his latest film, Terminator 3, from Vancouver to Los Angeles. During his election campaign he said the shift to California "helped create jobs, hundreds of new jobs, and that's what I want to do as governor. I want to bring businesses back to this state."

Some people (mostly Canadians) are saying the Americans are squawking about nothing. According to the Department of Foreign Affairs and International Trade, 42 U.S.-developed movies were made in Canada in 2001. During the same year, 581 movies were made in the Los Angeles region.

The Right Medicine

There is a wide gap in the cost of prescription drugs between Canada and the U.S. In Canada, government controls the price of drugs. In the United States, drug companies price their medicines by what the well-heeled market will bear.

The cost difference is anywhere between 30 to 50 percent, enough to attract a lot of Americans north of the border for a bargain.

First, they came by the busload, now most are ordering via the Internet or faxes. The value of the cross-border trade passed the one billion dollar mark in 2003.

The pharmaceutical industry, most of which is based in the U.S. is trying to put a stop to the drug trafficking.

The industry argument is that U.S. consumers are forced to pay the full cost of research and development, while people in countries that regulate drug prices get a free ride. No fair, says the industry, but it's up against some tough competition.

Many state governors are planning to switch their drug purchases to Canada to get supplies of medication for their state-funded plans. Illinois, for example, says it can save $91 million a year by shopping in Canada. Bargain-hungry voters seem to be grabbing the attention of politicians more than the drug companies that contribute tens of millions of dollars to election campaigns.

Interestingly, a lot of the drugs Canadian pharmacies are selling to American customers come from the U.S. in the first place. They are manufactured in U.S. plants and shipped north to supply the Canadian market.

The Mayor of New York, Michael Bloomberg, suggested a way to stop low-price medications from damaging the U.S. industry.

"What American pharmaceutical companies should do," advised the mayor, "is refuse to sell drugs to Canada until they get rid of price controls."

There are reports that some U.S. drug companies have started to limit the supplies they ship to Canada.

Trading with the Enemy

James Sabzali sold some water purifying equipment to hospitals in Cuba. Big mistake.

Mr. Sabzali was a self-employed Canadian businessman living in Hamilton when the transaction occurred in 1994. A couple of years later, Mr. Sabzali moved to Philadelphia and the U.S. government dropped 76 charges on him under the Trading with the Enemy Act of 1917.

Ever since Fidel Castro overthrew the U.S.-backed government of Cuba in 1958 the United States has banned all trade with the island, in addition, Washington has claimed the right to extend its ban to include all other countries.

Canada does not recognize that claim and carries on full trade and diplomatic relations with Cuba. In fact, Canada's Foreign Extraterritorial Measures Act forbids Canadians from complying with the U.S. embargo.

James Sabzali was convicted and faced a maximum of 205 years in prison and a fine of up to $5 million. In February 2004, he was relieved to settle for one year's probation and a fine of $10,000.

But, to get that settlement he had to admit guilt to a transaction that took place in Canada where it would have been against the law to refuse to undertake it. Now, there's a tangled problem that needs straightening out.

Ottawa lodged a formal protest with American authorities at the time the charges were laid. Washington simply ignored the complaint.

Reaping What They Sow

For decades, American farmers have complained about the Canadian Wheat Board (CWB). For just as long, Congressmen from wheat-growing states have listened to the complaints and acted.

There have been many U.S. probes of the Wheat Board aimed at finding evidence that it engages in unfair trading practices. So far, none of these investigations have come up with much, but the Bush administration makes no secret of the fact that it aims to close down the CWB.

The board has a monopoly on wheat exports from Canada, which the U.S. sees as state control of an industry that, in American eyes, ought to be open free enterprise. (There are some Canadian farmers who hold this view as well).

Since the Free Trade Agreement with the U.S. of 1989, Washington has challenged Canadian wheat trading practices ten times. Nine challenges have lost and the tenth is currently before the World Trade Organization.

The case against Canada is said to be weak, but it is a warning to Europe and Australia, which also market grains through government agencies. The U.S. wants governments to get out of the grain business and it's going to throw its weight about to achieve its goal.

This is old-style power trade negotiating, and it doesn't sit well with all the world's nations. It is one reason why anti-Americanism is on the rise everywhere. The Pew Research Center for People and the Press studied perceptions of America abroad in February, 2004.

Not surprisingly, after the invasion of Iraq, there is enormous hostility in Muslim countries. Osama bin Laden is more popular than George W. Bush in Pakistan, Morocco, and Jordan. Even among America's strongest traditional allies the U.S. image is taking a beating. Anti-Americanism is hitting new highs in France, Germany, and the United Kingdom.

HARD BARGAIN

During talks on free trade with the U.S. Canada tried, and failed, to give the agreement supremacy of American trade law. U.S. negotiators would not budge; they insisted their domestic trade laws could trump any rules set out in the agreements. Washington used its domestic trade laws to put the 27 percent tariff on softwood lumber. Under NAFTA, there is a dispute-settlement mechanism that is supposed to deal with this sort of thing. A panel of experts is appointed to make a ruling, but the panel's decision can be appealed on several fronts. And, even if the ruling goes against the party that launched the complaint, it can still file an almost identical case. In this way, the U.S. can drag out its attack on Canadian softwood lumber almost indefinitely. So, Prime Minister Paul Martin is trying to change this. In a speech in Sun Valley, Idaho in July 2004 he said, "We've got to find a way in which disputes cannot only be settled, but settled permanently."

DIPLOMATIC POKER

Canada has some powerful bargaining chips that it should play in trade talks with the U.S. There are some who say we can get the attention of Americans by using these chips and making linkages among issues. So, we link progress on the softwood lumber file (something we want) to greater access to Canadian energy (something the U.S. wants). The American southwest is getting desperate for water of which Canada has a lot and Ottawa would like the border reopened to exports of Canadian cattle.

Edmonton publisher Mel Hurtig is an ardent defender of Canadian interests. He would have aces up his sleeve ready for bargaining with U.S. interests. In an article in The Toronto Star in 2003, Mr. Hurtig made the following observation: "Any government with any kind of backbone would long ago have told the Americans that if they don't cancel their ... 27 percent softwood lumber tariffs ... we will immediately put an equivalent 27 percent duty on all of our oil, natural gas, uranium, and electricity exports to the U.S.

"... The very next day, a delegation from Congress would have sought a meeting with President George Bush, urging him to dump the softwood lumber lobby before their states suffered billions of dollars worth of irreparable higher energy costs and serious damage to their economies."

Manitoba Premier Gary Doer agrees on the need for more toughness in trade negotiations. At the 2004 Western Premiers' Conference he said that "Sending a carrier pigeon down Pennsylvania Avenue (on which the White House is located), with a diplomatic note doesn't work in the United States. You have got to be more aggressive."

Traditionally, issues such as these are dealt with separately, but linking them together might give Canada more clout. Of course, the strategy could backfire. Washington could invent a dispute and use its solution as leverage against us.

A CONTRARIAN

While a solid majority of Canadians thinks NAFTA has been good for Canada, Stephen Clarkson isn't so sure. A political economist at the University of Toronto, Mr. Clarkson has written that "Free trade has generated virtually no increase in Canadians' standard of living." He points out that membership in NAFTA has not protected Canada from U.S. trade remedies such as those used against softwood lumber exports. Mr. Clarkson adds that "NAFTA has no institutions that might give Canada and Mexico the voice they need to offset Washington's power over them."

FROM SPECIES TO SPECIES

BSE is a brain-wasting disease that was first identified in Britain in 1986. It is believed to have made a species jump from sheep infected with a similar ailment called scrapie. How? Because some bright spark thought it was a good idea to grind up the otherwise useless remains of dead sheep and feed them to cattle, which, of course, are herbivores. BSE has now been found in 24 countries.

In rare cases, the illness has made another species jump into humans. People who eat parts of cattle infected with BSE are at very low risk of contracting something called new variant Creutzfeldt-Jakob disease. This is a fatal brain-wasting illness similar to BSE, but there have only been 125 cases diagnosed worldwide.

OH! THAT MR. CASTRO

Hola Sun Holidays is a travel agency in Richmond Hill, Ontario. In March 2004, the U.S. Treasury Dept., placed a ban on the company doing business in America. Hola Sun is controlled by Fidel Castro. That would be Fidel Ferrer Castro of Toronto, not Fidel Castro Ruz the dictator who rules Cuba. No matter, says the U.S. government, which claims the travel agency is a front for the Cuban government.

Websites

Coalition for Fair Lumber Imports (U.S.)--http://www. fairlumbercoalition.org/

Forest Products Association of Canada--http://www.fpac.ca/

Websites

Canadian Centre for Policy Alternatives--http://www. Policyalternatives.ca/

Canadian Manufacturers and Exporters--http:// www.cme-mec.ca/national/ index-en.asp

Institute for Research on Public Policy--http://www. irpp.org/

The Policy Research Initiative--http:// policyresearch.gc.ca/page. asp?pagenm=rp_nal_index

Websites

Canadian Health Coalition--http://www.healthcoalition. ca/bse.html

Health Canada--http:// www.hc-sc.gc.ca/english/ diseases/bse/index.html

Websites

The Film and Television Action Committee--http://www.ftacusa.org/

Telefilm Canada--http://www.telefilm.gc.ca/ choix_flash.asp

Website

Canadian Wheat Board--http://www.cwb.ca/choice. html

FACT FILE

More than 257,000 Canadians are directly, employed by the forestry industry; a further 770,000 are indirectly employed.

FACT FILE

According to the Forest Products Association of Canada, an Eastern Canadian Black Spruce tree with a six-inch diameter at chest height could make over 12,500 sheets of 10M weight 8.5 x 11 inch bond writing paper. Or, the same tree could make 62,500 $20 bills.

DEFINITION

Customs Union. The North American Free Trade Agreement (NAFTA) eliminates duties charged on Canadian and U.S. goods crossing our shared border. However, the two countries charge different duties on goods coming in from non-NAFTA partners. Under a customs union, the flow of goods free of duty would continue but both countries would charge the same duties on goods coming from outside.

FACT FILE

In September 2003, Canada announced plans to open seven more consulates in the United States (in addition to the 11 already there) in a program of building trade and investment ties.

FACT FILE

In March 2003, the Washington Post reported that, while Mexico's trade volume has nearly tripled since NAFTA was signed, poverty has surged dramatically with 19 million more Mexicans living in poverty than 20 years ago.

FACT FILE

When the free trade agreement was signed in 1989, 70 percent of Canada's exports were going to the U.S.; today, 86 percent of our exports go south.

FACT FILE

Canada purchases about three percent of America Gross Domestic Product; the U.S. buys about 38 percent of Canada's GDP.

FACT FILE

Canada exports 45 percent of all the goods it makes--the highest percentage among major industrialized nations.

FACT FILE

A 2003 poll of more than 1,000 Canadians found that seven out often support the ,North American Free Trade Agreement.

FACT FILE

According to Statistics Canada, beef valued at about $4.1 billion was exported by Canada in 2002; roughly 90 percent of it going to the U.S.

FACT FILE

About three quarters of the American movies made outside the U.S. are made in Canada.

FACT FILE

The United States is the only country in the developed world that does not regulate the price of prescription medicines.

FACT FILE

The Canadian Wheat Board is the largest single seller of wheat and barley in the world, holding more than 20 percent of the international market.